旅行家集團 (TRV) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth quarter and full-year results teleconference for Travelers.

We ask that you hold all questions until the completion of formal remarks at which time you will be given instructions for the question-and-answer session.

As a reminder, this conference is being recorded on Tuesday, January 24, 2012.

At this time, I would like to turn the call over to Ms.

Gabriella Nawi, Senior Vice President of Investor Relations.

Ms.

Nawi, you may begin.

Thank you, Carlos.

Good morning and welcome to Travelers discussion of our fourth quarter and 2011 results.

Hopefully all of you have seen our press release, financial supplements, and web cast presentation released earlier this morning.

All of these materials can be found on our website at www.travelers.com under the Investors section.

Speaking today will be Jay Fishman, Chairman and CEO; Jay Benet, Chief Financial Officer; and Brian McLean, President and Chief Operating Officer.

Other members of senior management are also in the room available for the question-and-answer period.

They will discuss the financial results of our business and the current market environment.

They will refer to the web cast presentation as they go through prepared remarks and then we'll open it up for questions.

Before I turn it over to Jay, I would like to draw your attention to the explanatory note included at the end of the webcast.

Our presentation today includes forward-looking statements.

The Company cautions investors that any forward-looking statement involves risks and uncertainties and is not a guarantee of future performance.

Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors.

These factors are described in our earnings press release and in our most recent 10Q and 10K filed with the SEC.

We do not undertake any obligation to update forward-looking statements.

Also in our remarks or responses to questions, we may mention some non-GAAP financial measures.

Reconciliations are included in our recent earnings press release, financial supplement, and other materials that are available in the Investor section on our website.

And now, Jay Fishman.

Thank you, Gabi.

Good morning, everyone, and thank you for joining us today.

We're pleased that we posted solid results in the fourth quarter with net income per share at $1.51 and return on equity of 10%.

The story for the full year, of course, was the remarkable weather.

Weather losses were far and away the worst in our history and as a consequence, net earnings per share of $3.36 for the year were considerably lower than what we had become accustomed to.

Nevertheless, we price our product for the long-term and of course we don't control the weather.

There will be years such as 2006 and 2007 in which weather losses are surprisingly low; and of course, there will be years but hopefully not too many in which losses will be high.

Also, a less financially significant but nonetheless important piece of the 2011 story was the persistent low fixed income investment environment.

A year and a half ago, in the middle of 2010, we made the important decision that we were going to actively take steps in terms of rate, terms, and conditions to improve future returns in light of the insurance pricing environment and our view that it was increasingly likely that we would be facing low fixed income yields for some time to come.

We increased those efforts in the middle of 2011 in recognition of the possibility that weather patterns might be changing prospectively for the worst, particularly given the active weather we experienced in 2010 and into the first half of 2011.

We've shared with you before that we are just not big believers in magic market cycles.

We understand that our business is about one underwriter and one agent discussing one account at a time.

But we believe that our franchise was strong enough and we could seek improved profitability through improved rate terms and conditions without adverse effect to our business.

And 18 months later, we have proven that to be the case in most of our commercial businesses.

We take these actions selectively where analytics suggest they're warranted, and we try very hard never to be disruptive to our agents or insureds.

In our judgment, the success we've experienced speaks to the value that we bring to agents and customers.

And the success we've had positions the Company very well going into 2012.

In particular, business insurance, excluding national accounts, had a pure renewal rate gain of more than 6% for the quarter and 8% for December.

As a result, given our current view of lost trends, we anticipate widening of the underlying underwriting margins in business insurance in the first half of 2012.

In personal insurance, the regulatory environment is such that while the progress we've made is important, the real evidence of success remains ahead of us as we continue to roll out the pricing and underwriting changes that we have decided to pursue.

But I want to emphasize that the steps we're taking are not limited to rate.

There are a number of levers available to us in addition to rate as we pursue improved returns.

They include underwriting actions, particularly with respect to risk selection and location as well as changing underwriting standards with respect to roofs and loss history and personal insurance.

We've always been attentive to our expense base, and we continue to be very thoughtful in that regard.

Our commitment to improving perspective returns in personal insurance is no less than that which we had in business insurance when we began this program 18 months ago.

Every personal line's franchise is unique.

Every Company's agent group is different; and importantly, the value proposition to the insured's is quite different company to company.

We believe that we will be successful given our agents, our insureds, and the value that we bring.

So, while the bottom line financial results this year were less than we would have hoped, we couldn't be more pleased or more proud of our people when we look at the progress we've made to achieve improved returns, particularly given the difficult environment that continues to confront the US economy.

We have really demonstrated the value of the Travelers franchise to agents and insureds as well as the strength and diversity of the business that has allowed us to achieve all that we have over the past 18 months.

We run the business for the long-term and focus on returns over time.

We're also pleased and proud that since 2005, we've generated an average annual operating return on equity of 13%.

And with that, let me turn it over to Jay.

Thanks, Jay.

Let me begin by stating that we have maintained our strong cash position, ending the year with holding Company liquidity of $2.4 billion.

Operating cash flow of $351 million for the quarter, which included unusually high claim payments that resulted from this year's severe weather and a $150 million payment to our qualified pension plan that even in this very low interest rate environment, kept our funding level close to 90%.

And consistent with an on-going capital management strategy, we continue to return excess capital to our shareholders.

During the quarter, we repurchased $1.2 billion of our common stock, which was at the top of our previously announced range and paid $166 million in dividends, bringing year-to-date common stock repurchases to $2.9 billion and year-to-date dividends to $669 million.

As was the case this quarter, there have been many periods during the past several years in which our share repurchases and dividends significantly exceeded our earnings.

We achieved this by diligently and systematically identifying opportunities to free up capital, returning that freed up capital to our shareholders.

After several years of working at it, the process of freeing up capital is now largely complete.

So we now expect that future common share repurchases will be driven more by future earnings levels, taking into account capital needed for business growth and corporate needs such as debt service and pension obligations.

Having said that, we remain fully committed to identifying and returning excess capital to our shareholders, whatever the source.

I would also like to point out that all of our capital ratios remained at or better than target levels at the end of the year.

Net unrealized investment gains increased by $337 million during the quarter to $4.4 billion pretax or almost $2.9 billion after tax; and book value per share rose to $62.32, a 7% increase since the beginning of the year.

So now, let me turn the microphone over to Brian to go through the results in more detail.

Thanks, Jay.

I'll start with business insurance, and the real news in the segment is that the rate on the business we are writing is up significantly in the last six months and is now meaningfully exceeding our current view of loss trends.

Renewable premium change of 8% for the quarter included pure rate increases of over 6%.

This marks the fourth consecutive quarter that business insurance has seen positive rate change on renewed accounts; and as with recent quarters, rate increased across all product lines with the largest increases in worker's comp and auto.

We're very pleased that the months within the quarter continued to show sequential improvement in pricing with December renewal premium change of 10% and pure rate increase of 8% for the segment.

And based on our preliminary look at January business, pure rate gain looks pretty similar to what we achieved in December.

Net written premiums were up year-over-year driven by pricing gains and positive audit premiums.

Retention and new business levels were solid though down somewhat from recent quarters.

As we mentioned last quarter, execution on our pricing strategy may impact business volumes going forward; and so far, we continue to remain very comfortable with the balance between improved pricing and volumes.

Through 2011, this has been a very easy call.

I want to emphasize here that when we speak about pricing strategy, our goal is not simply to increase the price on every account.

It is a very granular approach based on analytics where we're looking for the appropriate price for the individual risk or the class of business.

It has never been a one size fits all approach.

Turning to losses, overall loss trend was relatively benign.

In worker's comp, we saw some higher than expected frequency from 2010.

In commercial auto, 2009 and 2010 bodily injury and 2011 physical damage losses were above our initial expectations.

So, some movement in loss trend concentrated in the 2010 accident year but more than offset by increased prices.

In summary, we feel extremely positive about the results in business insurance; and at our current pricing levels, we believe that we will be generating underlying, underwriting margin expansion beginning in the first half of 2012.

In the financial professional and international insurance segment, operating income of $152 million for the quarter was very strong and consistent with the prior year quarter.

This caps a very good year for the segment with full year earnings up more than 4% over what was a good 2010 result.

In surety, we continue to see strong margins and slightly less volume driven by sluggishness in construction spending.

We could not be more pleased that we've been able to maintain our current position as the market leader in this business during a very challenging economic environment without a meaningful increase in losses.

That we have done so speaks volumes about our ability to select risks, the credit quality of this business, and our approach of running this business for the long-term.

Looking at management liability, this remains a line of business where market pricing continues to be challenged, but less so at the smaller end, which is the source of most of our premium.

While our pricing here has lagged most of our other businesses, we were able to achieve positive renewal premium change for the second quarter in a row.

This is reflective of favorable production results in our private and nonprofit business and is due in part to benefits from recent technology investments.

In international, net written premiums were down quarter-over-quarter, due primarily to the timing of a few small reinsurance transactions and our exit from the personal lines business in Ireland.

Over the past several years, we have increased our focus on our international operation and we are pleased with the progress to date.

Quarter-over-quarter improvement in the underlying loss ratio more than offset the increase in the expense ratio, which is a good sign that the investment is paying off.

In personal insurance, looking at auto profitability, the story is essentially the same as discussed for commercial auto.

We've seen a moderate increase from expectations in bodily injury severity for the most recent accident years and a higher than anticipated level of claim frequency in severity in the physical damage coverages for the 2011 accident year.

The quarter-over-quarter impact of these items both from prior year and 2011 prior quarters was almost 6 combined ratio points.

Because of this volatility and the normal seasonality in the quarter, we think a better way to focus on the run rate of the business is to look at the full year combined ratio, which after adjusting for CATs and prior year development is 99.5.

This includes 1 point directly attributable to higher, non-CAT weather related losses and so 98.5 is our view of the current run rate, which is only 2 to 3 points higher than the combined ratio required to get us back to our historical target returns.

As Jay mentioned, we're committed to improving returns in this product in 2012 by aggressively pursuing rate and implementing local underwriting strategies.

In homeowner's and other, profits were once again down in the quarter due primarily to adverse weather.

Although the impact of the weather in the fourth quarter was dramatically less than in recent quarters, it was still slightly higher than expectations, driven by the unusual northeast October snowstorm.

In addition, we did have some increased claim activity in the non-CAT weather from earlier in the year.

As we have said many times, we obviously don't know what the weather will be in 2012; but given the experience of the last several years, we are managing the business with the expectations that weather losses may continue to run above longer term historical averages.

Accordingly, we're taking a broad-based assertive approach to managing the property product, which includes not only executing local pricing strategies but also seeking to tighten underwriting standards and changes in terms and conditions.

As examples, we are underwriting for age and quality of roof, reassessing how we factor in the number and type of previous claims, and implementing higher minimum deductibles for weather and non-weather claims.

Additionally, we are changing a small portion of our reinsurance program to create a structure that better responds to higher frequency, lower severity events.

So, we're taking a lot of actions in homeowners and are confident that these actions will further enhance the long-term profitability of our industry-leading franchise.

Turning to production for both agency, auto and property, renewal premium change and retention remains strong while new business continues to trend down slightly as we accelerate our pricing, underwriting in terms and conditions actions.

With that, I'll open it up to your questions.

Carlos, you can open it up for Q&A now.

Yes, ma'am.

Ma'am, would you like me to read the Q&A instructions now?

No, it's okay.

You can open -- you can open it up to questions now.

Thank you.

All right.

(Operator Instructions) The first question comes from the line of Keith Walsh with Citi.

Please go ahead.

Good morning, everybody.

Couple of questions.

First, business insurance, you alluded to in the press release, the underwriting margin looked like it would potentially improve in the first half of '12.

Is this more optimistic than what you talked about last quarter where you seem to be a lot more adamant that this would take time to earn in over the next 12 months?

And then I have a follow-up.

This is Jay.

The rate that we earned -- the rate that we wrote in the fourth quarter was obviously at a higher level than that which we wrote in the third quarter.

So, going into 2012, as we look out into 2012 as it earns, we are not more optimistic because that implies an attitude, this is fact.

The fact is the rate in the fourth quarter was higher than the rate in the third.

So wherever we were in the third quarter with respect to margins, we're better off today.

And it will simply take the time to earn that written premium into earned.

So, I would say that it is not a matter of optimism meaning feeling.

It is really a matter of arithmetic and fact.

We're in a better position today than we were in at the end of that third quarter with respect to the speed with which those margins will expand; and assuming that we continue to earn rate at this level, the effect that it will have in the margin arena.

Okay, and then just sticking with business insurance, obviously the rates are good.

But let's focus on the other part of the game here, the retention and new business, which are both down pretty sharply on the new business side especially.

So what are the dynamics of not just the accounts you're keeping, which we can see in the rate, but what about the accounts you're losing?

What's really going on there and if you could talk about new business hit rate?

Thanks.

First, I would disagree categorically with your characterization of it's down sharply.

The retention in business insurance for the fourth quarter was at 81% -- I'm sorry, 79%.

In the context of thinking about business long-term, that is still an exceptionally high retention rate.

We've gotten used to rates in those mid-80s that frankly, we had never, ever seen before.

You go back to the period in the late '90s and early 2000s in middle market retention, we struggled to get it above a number that started with a 7.

So what's happening on the business insurance side is really -- is just fine.

This is an easy trade-off.

The one segment of the business where retention has been lower than others has been in the larger end of select, right.

You may recall that we define select as the smallest end, which is highly technological and then there's express plus, which is the larger end of select.

That category remains a more challenging pricing environment.

It has to do with the way we think that regionals compete and how they view middle market pricing.

They don't have the technology to really compete effectively at the low end of small commercial.

They don't have the infrastructure to compete effectively at the true middle market business that we defined, so they tend to land in that larger end segment.

We've established our own thresholds for return expectations; and to the extent that we can capture business that meets those return thresholds, we'll take it.

And to the extent somebody else decides they want to take it away from us at a lower price, that's just fine.

We're -- so far, this has gone better than I think any of us would have expected 18 months ago.

And the trade-off at this point between return gains and retention, as you describe it as losses is just fine.

What was the 81?

The 81 was commercial accounts.

Overall -- this is Brian, overall in retention, ex the high end of select, we're right around 80, a little bit north of 80 and we feel great about that.

On the new business front, we're going to look at business in the market place and if we can find stuff that meets our return thresholds, we're going to write it; and in this environment, we're not going to search below that.

I'd make one other observation -- and it is more challenging for us to quantify it and demonstrate it, but we have indicators that will support what I'm about to say.

New business pricing is also better than it was.

It is harder to measure because you simply don't have the prior year expiring premium to compare it, but we are comparing new business pricing against a manual rate that we construct.

And when you look at that pattern, there are two things that are really encouraging.

One is that there's clearly lift going on and two, that the gap between -- I'm not speaking necessarily about this particular quarter, but looking at it over a longer period of time here, six, eight months, the gap between renewal and new has narrowed.

So, both of those things give us a pretty good sense of confidence that the pricing for new business is lifting as well.

Can't quite quantify it with the level of precision that we can renewal, but we feel awfully good about it.

The one last comment I would make on new is that our flow is still very solid.

So if this was a matter of we weren't getting the opportunity to quote on business and we weren't quoting, we would be a lot more concerned with that.

So we feel good about the flow.

We feel good about our activity in the market place and profitability levels will be where they will be.

All right, thanks.

Our next question comes from the line of Jay Cohen with Bank of America Merrill Lynch.

Please go ahead.

Thanks.

Two questions.

Both related to pricing.

Can you talk about your desire in 2012 to continue to push for rate on the commercial side because obviously you have achieved a certain amount of rate already?

Is that desire still very much in place or will you be satisfied now where the priced ROEs are and you don't need to push as much?

That's question number one.

Secondly, if you could describe the dialogue you're having with agents and brokers, obviously your effort is to improve profitability, improve returns, theirs is to do the best for their clients; how much pushback are you getting from the agents and have you sensed a change in that pushback?

Jay, I'll take on the first one.

No, our strategy now remains as is.

We're going to continue to do this selectively, thoughtfully, targeted, but we are going to continue.

And our goal -- we get asked all the time, what's the target?

We don't have one.

And that's partially because some of the conditions that we're responding to were just not as clear to us as they might be, I'm speaking specifically about weather.

I'm speaking about investment returns and so we're going to try and drive our products and our returns back to the historical kind of broad-based targets.

We still have a mid-teens ROE as a long term.

We talk about it over time.

But we still very much have that as a long-term target.

We are most certainly, from an individual pricing base, this is important now.

I'm not speaking about the return on equity in the whole place, I'm getting very granular with you and talking about the returns on allocated capital of individual products based upon the rate that we have in place today and our immediate view of loss trend.

We're getting closer.

We're making real progress in getting back to the levels that will ultimately convert to mid-teens ROE on a GAAP basis.

So, we've got some to go yet, but we are encouraged.

And we're going to keep driving until we find whether we can or not get back to our historical kind of return thresholds.

So, that's I think the answer with what does 2012 feel like from a strategic and tactical perspective.

I'll ask Bill Cunningham to talk about the agent arena.

Yes, good morning.

I would say on an overall basis, we look at our agent relationship as very strong partnerships.

And as being a strong partner, not surprising them is critical.

So being up-front early in the process with our agents in terms of what we're doing on an overall basis; but more importantly, as Brian mentioned, this is not a one size fits all.

So every account, communicating to the agent as early in the process as possible because our ultimate goal is together to be out with that client explaining why we need a given rate increase on a given transaction.

At the same time, we do from time to time, agents feel a need to test where we're coming from, so to give them time to do that.

But I would tell you, on an overall basis, it has been very positive in terms of the feedback we've received and in terms of how we've handled it.

So, again, partnership, early in the process, no surprises.

Together sitting down with the customer whenever possible and not putting them in a position where their back is against the wall is key to our partnership.

Great, thank you.

Our next question comes from the line of Mike Zaremski with Credit Suisse.

Please go ahead.

Mr.

Mike Zaremski, your line is open.

Please go ahead.

Can you go to the next caller, please?

Our next question comes from the line of Brian Meredith, UBS.

Please go ahead.

Yes, good morning.

Couple of questions here for you.

First, going back to the auto insurance results that you're seeing in the quarter.

You talked about the 98.5 and need to get it down to a 96.

The question I have there is, one, what are you doing to get it down there?

Is it just pure rate?

And is the market receptive of the type of rate that you need to get it back down to those 96 levels?

Then I have one follow-up.

Hey, Brian, this is Greg Toczydlowski.

In terms of the auto strategy, it's predominantly a rate strategy that we're focused on automobile.

When Jay and Brian talked about all the other levers that we're looking at from an underwriting in terms and conditions, we're focused a little more on the property side of the house with that.

So, we're monitoring our competitive position all the time; and given the regulatory environment that we live in, it takes a little bit of time before we can get that rate through.

But we're feeling that we're continuing to see good flow and good retention numbers, and we'll continue looking at that as we go forward with the business.

But obviously, if you're writing at a 98.5, 99, that's not your acceptable return level.

You can't get a double digit ROE off of that, right?

That's correct.

We're shooting closer to the combined ratio that you threw out, the 96 and we're going to be doing that through pricing.

And some of the dynamics, Brian, that we've been experiencing, we suspect are more broad-based.

This is just one but it is an unusual pattern that's developed.

With the slowdown of the new automobile business generally, price of used cars has risen.

As the price of used cars has risen, what's been interesting is the number of accidents that result in total losses where the car produces salvage have actually gone down.

Car relative value up, auto repair costs much less so more cars are being put back on the road.

As a consequence, what we've seen of that is an increase in sheet metal costs.

I'm not talking about new sheet metal.

I'm speaking now about replacement parts.

That's not unique to us.

That's going to be a condition that's going to affect lots of people.

Now, it may impact us a tad more because we tend to write more comprehensive coverage than some other carriers do, so we may be on the more extreme side of that.

But the kinds of things that we're seeing are not things that -- it is very important, are not things that indicate problems with underwriting or risk selection.

They are more episodic issues with respect to specific costs that are not, I would say unique to us.

So, our hope is, and of course, we're going to find out.

We're going to find out that we can go to the market and drive the kinds of rate increases that will bring this back, just like we did in business insurance.

We started extremely slowly.

We started 18 months ago asking fundamentally if our folks could get 1 point.

That's what we said.

Let's see if we can get 1 point and we've built on that every month.

We're going to take that same systematic, thoughtful, patient approach to auto insurance and homeowners and see what progress we can make.

Great.

And then question for Brian, when you mentioned pure rate also up 8%, can you define that?

Is that just rate less cost inflation?

No.

When we say pure rate, we're looking at the components of the premium change.

No exposure.

So, it is -- it is the rate charged per--.

Got you.

--per exposure on that, on the average renewal.

Got you.

And then how would that compare to what lost cost inflation kind of looks like in the quarter?

We don't peg the exact number, but we said we're meaningfully exceeding it.

Okay, great.

Excellent.

And then just lastly, interest rate assumption when you're talking about getting rate, you're getting close to the historical double digit ROE targets.

What are you thinking about the interest rate environment?

Mechanics on that are that all new money is discounted at the current yield curve.

Basically, where we invest money today and the surplus embedded in the business and that calculation is a more historical element premised on the fact that we have surplus that rolls off from old products and then comes on to support new.

But importantly, we're not kidding ourselves with investment return.

That's all new money at all new -- at the current yield curve today.

Thank you.

Our next question comes from the line of Vinay Misquith with Evercore Partners.

Please go ahead.

Hi, good morning.

The first question is on pricing.

Pricing on worker's compensation and commercial auto are up sharply because of high loss cost range.

Curious about what are trends using in pricing and other lines that you're pushing this year versus last year.

Yes, so a couple of clarifications on that.

The comp and the auto, we had the strongest rate improvement.

It is not just because we're seeing -- it is not because we're seeing sharp increases in lost costs there.

Obviously pricing always has something to do with the lost cost trends, but it is not a sharp increase.

We saw a fairly significant increase of a couple points really on almost every single line of business we write.

So, this isn't an example where comp is spiking up dramatically, auto is up a lot and everything else is kind of flat.

I would say every line in the commercial space is moving.

Comp and auto more dramatically but it is not completely out of pattern with everything else.

You're talking about rate.

Rate.

I'm talking about rate change.

As Brian always reminds all of us and you as well, in comp but in many of our lines of business, it is very much a state by state story.

There tends to be this view that it is one national rate, it's not.

There are states where either frequency or severity underlying trends are either more concerning or less concerning than others.

So, our reaction with respect to rate and what we're trying to accomplish is very much driven by the state environment specific to that particular risk.

Fair enough.

That's helpful.

As a follow-up, what is the impact of non-CAT weather for all the segments?

I believe for the personal lines, it was two points for the full year?

I'm looking at Greg.

Non-CAT weather and PI for the full year.

Do we disclose that level of granularity is the question?

It is not something that we've disclosed previously.

We obviously have some view of it.

But the substance of that answer is functionally dependent upon whether our assumption of normal weather is right or wrong or high or low.

So rather than trying to get into a debate about how much was non-CAT weather, that's just -- it is internal and I'm not sure the data is all that meaningful.

Okay, fair enough.

Just one last thing if I may, what amount of rate increase do you think on the personal auto line do you think will be necessary for you to get to your level of profitability that you're targeting?

Well, the arithmetic is actually pretty simple.

In personal insurance, if we want to drive the combined ratio down by 2 points, we got to get about 3 points of rate above and beyond what we otherwise would because we are obviously -- in effect, I'll say always getting rate.

That's not universally true.

But fundamentally, it is a business where the renewal price change has always been positive.

I can't recall that it ever went -- so, that's really the dynamic of kind of 3 points of rate above and beyond what we would otherwise get, and under the presumption that loss trend stays about where it is.

So there's an all other things being equal dynamic.

But the answer to that is, it is not as far away as it might otherwise seem.

Now, the market place will have to say whatever it wants to say, and we're obviously aware of that and our influence -- our market consequence, our breadth in business insurance is I think one of the attributes that's enabled us to accomplish what we did in BI.

We'll see whether that same dynamic holds true in personal in the same way, but it is just not that far off.

Just jumping back to his first question because we have answered part of this in the past.

So on the non-CAT weather, we said last quarter in business insurance and it is still probably about the right number is there is a point in the combined ratio of variance above a normal non-CAT weather number for the year.

I said in the quarter, it was pretty flat in BI, but for the year, it's still about a point.

In auto, personal lines, I said there was a point of -- clearly identifiable non-CAT weather that might actually be more in auto.

And the home number, I don't remember off the top of my head.

If we're going to go on the same basis.

Full year.

Property would be closer to 2 to 3 points.

Variance from--.

From whatever we're getting.

Coming back to the notion of whatever was normally our view of normal weather might have otherwise been.

That's very helpful.

Thank you very much.

Our next question comes from the line of Jay Gelb with Barclays Capital.

Please go ahead.

Thanks.

I had two questions for you.

The first is on the share buyback pace for 2012.

Should we -- I just want to clarify, should we be thinking about buybacks being equal to net income, operating earnings, retained earnings; can you just clarify?

What we were trying to say was it should be looked at based on earnings.

So not retained earnings for sure.

And then net income versus operating income, they are both income and they have tended to be relatively similar.

So, we think mostly in terms of operating income, but if there were large, realized gains or something, we would take that into account as well.

But that would be more episodic.

All right.

Just wanted to confirm on that.

And then what's the maximum comfort level on debt to capital ex the unrealized gains?

We've talked in the past about for a AA company like us of being in the 15% to 25% range.

We're at a little over 23%.

Part of the 23% is actually driven up by prefunding $250 million of debt that's going to mature in 2012.

So, that's worth about 7 basis points in that calculation.

But being within that range is a very comfortable place for us.

Got you.

Then the final one is on the nonfixed income after tax earnings, the -- it was down in 4Q versus 3Q.

I'm just trying to figure out what you feel would be a reasonable run rate heading into this year?

Jay, Bill Heyman.

For what it is worth, the quarter came in just about exactly where we thought the quarter would come in on October 1, as we looked at the matrix of factors which affect returns in the non-fixed income portfolio.

I suspect the best way to make predictions about the future is to look at the bar graph back a few years, try to draw a mean.

I figure that's about what we'll make.

Because if we couldn't make that, we probably wouldn't maintain the portfolio.

For what it's worth, there were no real surprises in the fourth quarter, this was about what we expected.

Okay, so if I look at that over the past couple of years probably averaging around $50 million to $65 million a quarter.

I would have to look at the bar graph.

I think on the low side of that.

Okay, thanks.

This is Jay.

It is one of those things, as you know, it is really difficult to predict.

So whatever you put in your model, there is a level of uncertainty.

We have great visibility into the fixed income part of the portfolio, but this is going to be so dependent upon what the economy does.

Understood.

Our next question comes from the line of Greg Locraft with Morgan Stanley.

Please go ahead.

Mr.

Locraft, your line is open.

Please go ahead.

Hello, do you have me?

We've got you.

Okay, great.

Wanted to dig into the worker's comp line for a bit, just get some color on the market.

I guess more specifically, one of your competitors in Hartford has had some emerging troubles through 2011 in that line.

Some other cracks are appearing from other competition.

I know you don't believe in the cycle but what are you seeing specifically in that line?

How do they manage their books of business different and why are you so confident that this won't begin to have some issues into '12 and beyond?

Let me talk for a second about -- in a little more specific what we're seeing.

I'm not going to comment on how other companies might be managing their business, but we can talk certainly about how we manage ours.

So, just to be clear on worker's comp.

What we saw this year in the aggregate, continues to be a pretty strong picture for us.

So, if you look at the prior years, '02 through '09, every year continued to perform better than we had expected.

So, positive in every one of those years.

In 2010, we did see--.

In fact, Bill said to me yesterday, make sure you still believe this.

If you look back to '02, the current expected loss outcome in each of the years '02 through '09 is currently lower than the original estimate at the time we made it.

Better.

Better.

Lower loss ratio, better result.

Right.

'02 through '09.

So in 2010, we did see some continuation of the increase in late-reported claims that we discussed in the second quarter.

We believe this is really a direct result of the impact of the great recession on worker's comp claim reporting patterns.

And so the 2010 year was out of pattern.

But overall, all years including 2010, we continued to have positive development on our overall worker's comp book.

The impact of all of that is fully reflected in not just 2010 but rolled into how we looked at 2011 and what we booked there; and most importantly, is completely rolled into how we're pricing the product today.

And given the pricing improvements that we've gotten, we feel good about the returns and the profitability levels of the comp business we're writing today.

Now as Bill said before, it is a state by state game and very, very granularly managed.

A couple of other facts that I think would be helpful.

First, the magnitude of the 2010 -- I'll call it excess claim activity to put a number on it, was under $100 million after tax.

That's the magnitude of that change.

And again, what we see, everything that we see tells us that those were occurrence dates, incidents in '10 that didn't manifest themselves until 2011.

That's an unusual dynamic, something we haven't seen before.

Maybe it's a function of the economy and how people feel about job security and whether they raise their hands or not.

And again, to Brian's point, we've rolled that forward into the 2011 loss estimate, booked that fully and are currently incorporating that into our 2012 estimate for pricing and reserving.

And this is -- I think it is important because it will again help quantify it.

Full in, the combination of the rate gains and the loss trends and the positives and the negative '10 and everything else; our estimate of that allocated return on capital measure that we use to measure the profitability of the products in worker's comp all in now is low double digits.

It is low double digits.

So, I think it is helpful to put a perspective on what we saw.

Now our view on that 2010 development is that it is more -- I'll call it timing rather than a permanent change; and of course, we'll see whether that's the case or not.

To get back to your other question about -- and of course, you all know this, you're sophisticated analysts, you get it.

The issue of how one company reports versus another, the critical element in all this is what did the Company originally assume?

So, whatever experience we have in the loss arena is sort of one thing, but what original assumptions were made is a critical element in determining the embedded health of the business and I'd come back to the '02 to '09 period as at least indicative of the way we view the line.

Importantly, severity remains as expected, that's an important element.

So, the actual inflation dynamic there is not an issue.

And lastly, and again, this just speaks to the mechanics of the business and I think the integrity of the process here, the delta, the change that we had assumed from the '10 into the '11 year, that turned out to be -- at least so far remains a good assumption.

The base of your '10 changed some, but the delta into '11 that we had anticipated turned out to be -- at least so far, consistent.

So, a tiny bit of a complicated story, but you've got all of the news.

That's very helpful.

Thank you.

Our next question comes from the line of Michael Nannizzi with Goldman Sachs.

Please proceed with your question.

Thanks.

Just a couple questions here.

One thing we haven't talked about for a little while is the direct initiative.

You mentioned it, it looked like in the release, about 80 basis points on a combined ratio which something about $0.30 a share if my math is right.

So, clearly more significant than it was as a percentage of earnings when you launched it.

What do you look at it in the development of that business to let you know that you're creating value and that you're hitting your objectives so that it eventually starts to bring in earnings as opposed to create that pressure and then just one follow-up?

Thanks.

I'll let Doreen and Greg answer as well, but I'd pick the one element that we continue to work on from an operational dynamic is we're getting pretty good at getting people through the quote process and getting quotes out and our next step is to do better, next step.

The thing we're working on more than anything else right now is to do better in converting those quotes into actual sales.

And it is not immediately apparent to us that it is a function of price although it won't surprise any of you.

If you listen to all of the ads, the comment is those who switched saved whatever the number is, $400, no great shock if you quote someone $400 more than they're currently paying, the likelihood of them switching is actually pretty low.

So the comment price is not an insignificant element there.

We have a -- I don't know exactly what to call it, but we have a conversion curve.

We know relative to at least what the customer discloses to us what their current price is.

We know how far either plus or minus to that mark, in a large number of accounts, how close we need to be to convert.

But we've got more work to do in the conversion process so that the dollars that we're spending in the media and we're not spending nearly what anyone else in the big players are.

But to maximize that investment is to get more of the quotes converted into sales.

So, that's our dynamic.

Some of it is we suspect, I'll say reputational.

I think there are other companies that have, as a result of doing this for years, earned a reputation for being less expensive.

Whether that's true or not is a whole other question, but they seemed to have earned a reputation for it.

We have to continue to build a reputation dynamic around the value proposition that we give.

We're never going to be great at selling a half a coverage sandwich.

If a whole sandwich is $6, we're not comfortable selling a half a sandwich for $3.10.

That's just sort of not who we are culturally.

We're much more comfortable providing customers with the coverage they need rather than the dynamic of how much can you afford.

That's just not us.

We're going to keep working at this and we've got our fingers crossed.

We're well on our way.

Got it.

And then just a little bit more on worker's comp.

Just the premium line was pretty bumpy during the year.

I'm just curious, is that a result of -- is that pure seasonality?

Is that a result of a change in the competitive dynamic or just the market itself or any strategic change on your end?

It is actually more just pricing and audit premium running through the number.

So, a decent piece of that is movement of the underlying exposure of the accounts and what payrolls have been and how those have moved up and especially when compared to a year ago when many comp accounts had some fairly significant return premium dynamic.

So you're going from a return premium environment to an audit premium plus environment, and that's probably the biggest single driver of the movements in that line.

And from our perspective, that's a good thing.

Oh, yes, that's definitely a good thing.

It is not initially a policy count, it is more of an exposure per unit?

Yes.

Got it.

Okay.

Great.

Thank you.

Payroll's up and down.

The initial premium is based on an estimate and coming down the road when the policy expires, we do an audit.

If the actual payroll was less than had originally been disclosed to us then we have a return of premium.

If the payroll turns out to be more than was originally disclosed to us, we have an additional billing.

During the depths of that great recession, we were in the return to premium arena as customers shed payrolls far more aggressively than they had anticipated they would.

And now they reached a stage where they were flattening out, that brought the audit premium back to zero and now they're growing modestly.

And so what we're seeing again is now a change into the build arena of audit premium.

Great.

Any change in the competitive dynamic over the year in the larger case market that you've noticed?

This is Bill Cunningham.

Nothing discernible.

When you say large--.

You're talking large national account, loss responsive business?

Like your commercial accounts.

Not the small -- not the select or select express, not the small end of commercial but kind of the down the middle commercial accounts business.

I would just say over the course of the last 12 months, some of the cracks that you have described, we have seen competitors pushing price and moving price in a northerly direction in a number of states that we compete with them in.

Great.

Thank you.

The next question comes from the line of Josh Shanker with Deutsche Bank.

I'm sorry.

Before we take that question, let me just -- because Bill used words that we understand here internally.

I think what he was saying, you should correct me if I'm wrong.

But I think what you're saying is when you said cracks, what you're seeing is other competitors struggling with the worker's comp line and not an insignificant increase in rates by other competitors as well.

We never deal with other competitors.

We get anecdotal observations from agents.

But that's what Bill is speaking about.

Where -- particularly in the states that have been more challenging from a loss trend environment, we see other -- we understand, again, we never talk with other competitors about rates in any way, but we see them reaching for rate as well in that competitive environment.

That's what the comment was.

Josh Shanker's question, please.

Everyone, during the Goldman Sachs financial service conference call, you dissuaded investors from taking a look at Schedule P.

Obviously, we're going to look at that.

But maybe you know more than we do and if you can walk through the math on why our looking at Schedule P will lead us to the wrong answers and maybe you can talk about what your reserves are going to look like when we do that following the 2011 numbers?

First, I don't think we ever dissuaded anybody from looking at Schedule P.

Go back to that Goldman Sachs conference, we were talking about the complexity of making -- I'll call it somewhat simplistic assumptions based upon overall views, but our Schedule P is going to reveal the things that Brian shared with you earlier.

You're going to see that the 2010 accident year for worker's comp had more claim frequency than we originally anticipated.

You're going to see in the auto liability line, commercial oil for sure.

You're going to see '10, '09 -- is it '09 and '10?

A tiny bit in '08, but mostly '09 and '10.

And I think those are going to be the things that you'll see that -- that's why we're providing the explanation here today so that people understand what it is they'll be looking at when they see it.

Okay.

And then so far from what you're seeing, looking at the beginning of the year of 2011 to where you are today, those things you're seeing in 2010 have sort of reversed, meaning are not showing up this year?

Well, we booked the change into 2011, first of all.

In other words, the base year -- what we do when we develop loss estimates for a given year, we start out with the immediate preceding year.

We make adjustments for frequency and severity that we anticipate.

So, when 2010 had that $94 million after-tax increase in claim activity that I spoke about, we obviously rolled that forward into our 2011 loss estimate and that's been booked and recorded.

As we look at 2012, we obviously are starting out with a base -- again, now you're asking the complicated question of that $94 million in that year, how much is a timing difference that we see from one year to the next and how much is a permanent difference; but we certainly are going into 2012, eyes wide open with respect to the 2010 accident year and what its effect was.

That gets me back to my comment earlier that the estimated return on allocated capital for comp broadly speaking -- broadly meaning across the whole book is at the moment in the low double digit range.

So -- and that's incorporating that 2010 development into that.

And if I could add a couple of things.

There is a story line that you have to follow in our Q's, where we're describing things that are taking place each quarter.

Some of which as Jay said, impact us as we look at the business going forward and that's when we talk about base year movement and our adjustments for current year loss picks and ultimate results for a particular year.

There are other things that take place that get reflected in Schedule P that don't impact the numbers going forward.

So if you look at some of the property lines as an example, what you'll see is disclosure in our 10-Qs talking about some development that's taken place.

One that comes to mind were the Arizona hailstorms that impacted us from 2010.

Where we made loss estimates associated with what we had been seeing; and then in 2011, saw further development on those losses that get reflected on our property lines.

Those are losses that are episodic, and therefore, don't impact us when it comes to looking at loss picks.

So, when we say it is complicated, those are the kind of things that we're talking about.

The granularity of information that we go through to make a determination, number one, are our reserves fairly stated at the end of each quarter, which are always a best estimate.

And then two, what does this information tell us about the past as well as the future?

And then trying to very granularly and thoughtfully build those into our ongoing analysis.

The important point I think we made amongst those, but the important point we made back at the Goldman Sachs Day is that there seems to be a view somehow that current year reserve adequacy is a function of rate.

And that context is just foreign to us, we don't understand it actually.

We make estimates of losses and we make those estimates of losses frequency, severity; and so the notion that we would not be making our best estimate because a couple of years ago rate was more challenged, relative to five years ago when it was less challenged is just completely foreign to us.

We don't get that.

So, to us, at least -- just for Travelers, the way we establish loss reserves are independent of whatever the rate is that is being gained on it.

They're very granularly determined.

They're constantly being reviewed by actuaries internally.

And you've heard us say when we make readjustments to current year loss picks -- current year loss picks, not prior year, it is because we're seeing activity either up or down that was different from what we had originally expected that loss activity to be.

So, that was the comment.

And no, by all means dig into Schedule P.

I appreciate it.

Thank you.

Very granular answers.

Just a quick numbers question.

Brian went through the math on personal auto.

What is the run rate for the US -- for annual CATs per year in the loss ratio, normalized?

In auto?

In auto.

You said you were targeting 96, you got to 98.5, but that doesn't include any normalized CATs.

I just wanted to also get that part -- I think at least, maybe it did.

Josh, it is basis points, really insignificant for the auto side.

Would be the normal expectation.

Okay, thank you.

Our next question comes from the line of Matthew Heimermann with JPMorgan.

Please go ahead.

Hi, couple of questions.

One just to start clarifying.

Your 99.5 to 98.5 run rate, was that personal auto or personal insurance?

That was personal auto and the delta is the 1 point of pretty clearly identifiable weather-related activity above that pretty low normal activity.

Okay, that's fair.

I just wanted to make sure I heard that right.

Then just within FPI, obviously you have been exiting the personal lines business in Ireland.

And you've talked about that from a premium standpoint.

Just curious whether or not that exit is having any positive impact on the loss ratio; and if so, how much?

I don't know the exact number.

It should have a positive impact but it will be pretty small.

Okay.

Then just kind of timing wise, are we -- I mean, my sense is there might be one more quarter of cycling through; is that right in terms of timing?

Maybe two.

But I think the overall personalized premium in 2011 was about $24 million, $25 million.

It is pretty small and should tail off the next couple of quarters.

Okay.

And then bigger question, just be -- how customers are adapting to the rate increases.

Obviously we know exposures are up on an underlying basis with the economy, which puts some price pressure at least dollar spend pressure on customers.

You're raising rates on top of that.

Are you seeing customers either change the limits they're buying -- I recognize not all your customers may have the flexibility to do so; but are you seeing any change in buying behavior their limits, deductibles or other things clients are doing to try to mitigate kind of the dollar impact on them?

This is Bill Cunningham.

I would say we're not seeing any meaningful change in the commercial space on terms and conditions, either limits or deductibles.

Where we are seeing changes in deductibles would be on the larger property end in wind exposed areas and that would be on the margin.

But I would say across the board, clients are opting more for a price increase than a deductible increase; but again, that's largely anecdotal.

But the numbers would support that it's more about the price and less about the terms and conditions.

Okay.

Then, can you just help on a written basis, connect the dots between what you reported for rate increases, exposure increases, and business insurance relative to what we're actually seeing show up on the net line in terms of written premium increases?

I mean I get retention is down but it doesn't seem to be down relative to the positive push from those two things to explain the delta.

It is a retention and I would say new business dynamic.

The new business being off a bit.

All right.

Maybe I'll follow up afterwards.

I'm not sure I got the question there, Matt, I'm sorry.

Based on your chart, it looks like you're saying business insurance prices are up 6%.

It looks like based on your chart, you're showing exposure growth of somewhere between 2% and 4%, which would make the range 8% to 10%.

Retention is down 4%, so that takes that to 4% to 6%.

And I get new business is down a little bit, but that feels more like about 100 BPS, not expected better growth.

Okay, so you got audit premiums.

Fred, why don't you?

Well, that was a positive year on the delta, too, though.

Right.

Yes.

If you're trying to reconcile written premium year-over-year, you've got the rate as a big improvement.

On a full-year basis, about 5 points.

You've got 2.5 points of exposure.

You've got retention down 5 points.

But you've also got -- a change in new business.

The biggest driver offsetting the price gains is retention and new business in the quarter.

Right, then you've got auto premiums swinging the other way to positives.

All right.

Maybe I'll follow up off-line because I'm not exactly following, but thank you.

Our next question comes from the line of Josh Stirling with Sanford Bernstein.

Please go ahead.

Hey, good morning.

Thanks for taking the call.

And appreciate obviously all the color and disclosures on the reserve issues both in the change and you've released substantial closures in your third quarter stat filings, which I think are better than a lot of your peers.

The one question I would have, basically to follow up on Josh's conversation and all of the sort of talking we've done about worker's comp and commercial and personal auto and the challenges there, recent past couple of quarters have seen a lot of releases from surety, as well as I think the disclosures in your third quarter regulatory filing suggests that the excess lines in liability.

So claims made in occurrence are funding much of the recent reserve favorable development as well as it potentially sounded like there was maybe a ULAE reclassification.

I think we use the word episodic before.

I'm curious, should investors be looking at these as the sorts of things that we should be plugging into our models for next year as favorable offsets to potentially -- modest favorable development in going forward and the other lines we're talking about potential challenges?

This is Jay Benet.

We've answered this question a number of times in the past.

We, as a management team, have these very, very robust processes each quarter to evaluate what our reserve changes look like and to come up with our best estimate of reserves and we have no guidance.

We have no views that we would have either internally or to share externally as to how reserves are going to develop.

So, I think you as an analyst can feel free to think of whatever patterns you've seen, whatever you're hearing from other companies.

As Jay said, it is all dependent upon what a company's assumptions are.

What the starting point is.

What are the loss ratios that they have at this point in time and how things are going to develop.

One company's development could look a lot different than another company's.

But I think you see our history.

You see what we've done in terms of putting up reserves in the past.

How those reserves have developed.

And as I said, our view is we're always at best estimate.

You can come up with whatever view you think is appropriate.

Yes, that's certainly fair and I expected something like that.

Just in the context of sureties, obviously sort of an episodic credit-related reserve and then the commentary you had suggested around the excess coverages was this was related to favorable traditional environment over the past number of years.

I was just wondering if we should look at this as kind of a one-time thing and maybe you've already answered that.

We're always building in the current view as to how an environment has changed.

So, if we had certain views of the tort environment, let's say several years ago that was driving a certain level of reserves and that tort environment has improved to date, we would look at okay, where is it today and we'd have some view as to where we think it might go in the future and that would be the basis upon which we reserve.

But what we don't do is we don't say gee, there is some continuum of improvement.

Let's book a quarter of it now, we'll book a quarter next quarter and keep going.

It is always based on facts and circumstances as they exist and it is the best estimate at that point in time.

If you go back in time in our disclosures, what you'll see is the description of what's generating positive development, it has changed.

It has been this line or the other line or that year in property or liability, just -- it is a very big business.

We're making estimates for multi-billions of dollars of losses every given year.

And things just worked out somewhat differently than we had originally expected.

But it is not as if there is a pattern there that somehow is reliable.

It has changed over the years and different lines show up at different times.

If we had a -- as we said at the Goldman Sachs day, our goal is to get it right.

It is not -- it is not just to -- I know it feels good when you have that favorable reserve development in the period that it is reported.

But we're pricing product every day.

And if we're going to make the most of what we got, either growing our business or recognizing loss trend or adjusting, the only way we're going to make really thoughtful decisions, really good ones is if we get it right.

That's our goal.

Our goal is to get it right.

It is obviously better that -- everybody says favorable is better than unfavorable, but -- and maybe that's true at the moment; but when we have favorable development, that means that we overcosted our product in the year in which -- from the year it relates to and maybe we could have sold more if we had a different view of cost.

So we're very driven, to try and get it right.

Yes, I think that's right.

I personally grew up in the business always thinking that right answer was the right answer, and it could lead you to better decisions.

I think you obviously sort of do a good job of explaining that we shouldn't count on these things going forward.

I don't think there's any issues there.

If I could just ask one final numbers question.

We would like to move on to the next question.

Thank you.

Kind of gave you your tip.

Our last question comes from the line of Cliff Gallant with KBW.

Please go ahead.

Thank you for squeezing me in.

Just on the investment portfolio, do you anticipate any changes in strategy and can you comment on the outlook for the non-fixed income portion of the portfolio please?

No changes in strategy.

We have a strategy which we think accommodates a very wide range of conditions.

In terms of the outlook for the portfolio, am I allowed to give an outlook?

We sort of did.

Someone else had asked about the non-fixed income.

That was what could be expected on an on-going basis.

I think I'm being asked for an outlook for the quarter.

Okay.

That's fine.

I appreciate it.

Typically, we don't venture an outlook for the quarter.

Cliff, that was it?

Yes, thank you.

Thank you.

Okay, thank you for joining the call.

We appreciate the time given that we went a bit over.

But if you have any further questions, please contact myself or Andrew Hersom in the IR Department.

Thanks and have a good day.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your lines.